Thank you to Scott Shane for writing about the recently proposed Innovative Technologies Investment Incentive Act of 2010 (the "Bill") (The Bill is embedded via Scribd below.) And thank you to Bill Carleton for alerting me to Shane's article.

I agree with Shane that the Bill has problems. However, I like the general idea. We have an employment problem in this country. We need to find ways to translate money that is on the sidelines into jobs. What better way to do that than allow investors whose money goes to employ people a dollar for dollar tax credit for their investment? I know of no better idea. Besides, what would the harm be in trying it to see if it works? What would FDR say? I say, let's do it--and let's see what happens.

My suggestions to improve the Bill are:

  • don't limit the credit to investments in companies that receive SBIR grants; allow the credit for investments in all companies as long as they use the invested funds to employ people; I think relatively simple rules could be put in place to ensure that invested capital was used to employ people;
  • make the tax credit dollar for dollar; in other words, if an investor invested $100,000 in a company that used the funds to employ people, that investor would receive a $100,000 credit against the investor's tax bill that year; don't put any complex phase outs or anything of that nature in the bill; make it simple; make sure that this "credit" wasn't an alternative minimum adjustment;
  • revise the act to expressly allow these investments to be made without regard to any securities law registration or exemption requirements; in other words, free up anyone to invest, not just "accredited investors"; and allow companies to advertise for funds and expressly have the federal law supersede any conflicting state securities laws.  

The trouble with investing in the stock of companies, from a tax perspective, is that you cannot recover your invested capital (your tax basis) until you sell the stock. If you buy property, plant or equipment, at least from a tax perspective you can recover your basis over the reasonably expected life of the property, plant or equipment. Not so with stock. You have to wait to recover your basis until you sell the stock. This encourages, I believe, at least in part, the build it to flip it mind set, which is not necessarily the best viewpoint for building long term value.

I think the Congressional representatives who proposed the Bill are on the right track, but they need to be bolder. Again, my suggestions are as follows:

  • Don't tie the credit to investment in companies that have received SBIR grants; make it available to any company that uses the invested capital to employ people.
  • Don't limit the credit to 25% of the invested amount--allow an immediate credit against taxes owed for all amounts invested--if the amounts invested are used to pay employees.
  • Repeal all securities law restrictions for making these types of investments.